Ecuador: Government Hikes Royalties on Petroleum Companies, Pressures Banks for Lower Interest Rates

NotiSur - South American Political and Economic Affairs, October 19, 2007 | Go to article overview

Ecuador: Government Hikes Royalties on Petroleum Companies, Pressures Banks for Lower Interest Rates


In the days immediately after his party's overwhelming win in an election to name members of an assembly to rewrite the national Constitution (see NotiSur, 2007-10-12), Ecuador's President Rafael Correa announced plans to heavily tax private companies extracting oil and pressured banks to reduce interest rates. The taxes on petroleum companies would take 99% of additional profits beyond the price of oil at the time the companies signed their contracts with the government. Correa also announced Ecuador's intent to rejoin the Organization of Petroleum Exporting Countries (OPEC). 99% of "extraordinary" profits to generate US$700 million

High petroleum prices motivated Correa to announce the elevation of taxation in a way that surprised the Ecuadoran press and oil companies. He made the decision through an executive decree, reformulating a "50/50" deal that had previously been in effect. The decree modified Article 2 of the "Reglamento de Aplicacion de la Ley 42," which established that, "The participation of the state in the excesses of sale prices of petroleum not agreed upon or unforeseen in participation contracts...corresponds to at least 50%."

Correa tacked an extra 49% to the 50% figure, which his government says is legal under the contracts signed and does not constitute a "nationalization" of petroleum resources. Correa has rejected calls to nationalize the country's natural resources, as has been done in Venezuela and Bolivia, saying that the laws in effect allow Ecuador to get an adequate share of its resource wealth.

With the new regime, the government hopes to collect US$700 million annually, said Mines and Petroleum Minister Galo Chiriboga. Under the 50/50 distribution, the national treasury had collected about US$200 million in the first year that the law had been in effect. Correa called the increase "just and constitutional." Chiriboga referenced other calculations that foresaw an increase in revenue of US$830 to US$849 million. The revenue is set to go to three funds: the Fondo de Estabilizacion Petrolera (FEP), the Fondo de Ahorro y Contingencias (FAC) and the Cuenta Especial de Reactivacion Productiva (Cereps). The FEP serves as a reserve for when oil prices fall and is used for foreign debt payments and social spending; the FAC is a savings fund and Cereps is used for productivity stimulus.

According to the government understanding of the contracts, at the moment companies signed contracts to extract Ecuadoran crude, a reference price was fixed at an average price of US$17 per barrel. The reference is adjusted annually for US inflation and most recently was calculated at US$24 per barrel for private oil companies.

The price of Ecuadoran crude bordered on US$64 per barrel in the first week of October. The difference between that and the baseline price of US$24 per barrel was divided half and half between the state and the companies, but now the companies will only get 1% of that "excess."

The decision was made as four companies expressed their intention to renegotiate their contracts. Chiriboga says dialogue remains open, claiming that the foreign corporations would not decide to leave the country.

The Energy Ministry says the state has a total of 20 contracts with foreign petroleum countries. Ecuador is South America's fifth-largest crude exporter, with about 500,000 barrels produced per day. The oil sector is the most important one for the economy and government financing, with 35% of the federal budget coming from petroleum. Companies like Petroleos de Brasil (Petrobras), Repsol YPF, City Oriente, Ciadi, CNPC and Tarapoa have contracts that last into at least the next decade, with some set to be in effect until 2022 or 2024.

A spokesperson for private petroleum companies, Rene Ortiz, said the new scheme would damage dealings between them and the government, saying the arrangement, "put the companies in the position of economic inviability. …

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Ecuador: Government Hikes Royalties on Petroleum Companies, Pressures Banks for Lower Interest Rates
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